Geo Company's western territory's forecasted income statement for the upcoming year is as follows: $$\begin{array} { | l | r |}
\hline \text { Sales revenue } & \$ 850,000 \
\hline \text { Variable costs } & ( 520,000 ) \
\hline \text { Contribution margin } & \$ 330,000 \
\hline \text { Fixed costs } & ( 490,000 ) \
\hline \text { Operating loss } & \$ ( 160,000 ) \
\hline
\end{array}$$ The company's management is considering dropping the western territory and has determined that 90% of the fixed costs are avoidable. What is the change in the forecasted operating loss for the upcoming year if the western territory is dropped? Assume the company predicts an operating loss across the entire company.

Question

Geo Company's western territory's forecasted income statement for the upcoming year is as follows: $$\begin{array} { | l | r |} 
\hline \text { Sales revenue } & \$ 850,000 \
\hline \text { Variable costs } & ( 520,000 ) \
\hline \text { Contribution margin } & \$ 330,000 \
\hline \text { Fixed costs } & ( 490,000 ) \
\hline \text { Operating loss } & \$ ( 160,000 ) \
\hline
\end{array}$$ The company's management is considering dropping the western territory and has determined that 90% of the fixed costs are avoidable. What is the change in the forecasted operating loss for the upcoming year if the western territory is dropped? Assume the company predicts an operating loss across the entire company.

Quizplus · Accepted Answer

If the western territory is dropped, 90% of the fixed costs ($490,000) are avoidable, which means $441,000 can be saved. The contribution margin lost is $330,000. Therefore, the net effect is a reduction in loss by $441,000 - $330,000 = $111,000.

Geo Company's Western Territory's Forecasted Income Statement for the Upcoming